Monday, May 4, 2009

Professional Prohibitions to Disclosing Client Information in Grand Jury Investigations

State-related agencies regulate professional practice of lawyers and CPAs. Among the obligations imposed upon these professions is an obligation to protect client information. This blog deals with the CPAs obligations to protect client information, although much of the analysis applies to lawyers as well.

A state agency related obligation to protect client information does not make that information privileged in the federal system. The federal system recognizes the attorney-client privilege, but that privilege is narrower than the obligation of a lawyer to protect client information. And, most importantly for this blog's purpose, the federal system recognizes no CPA client privilege. The federal system does have a modified privilege in Section 7525 that are applicable in noncriminal cases.

In Texas, the CPA obligation to protect client information is found in Tex. Occ. Code Ann. § 901.457 (West 2004); 34 Tex. Reg. 428 (2009) (to be codified as amendment to 22 Tex. Admin. Code § 501.75, effective January 28, 2009) (Tex. Bd. of Pub. Accountancy, Confidential Client Communications). These provisions permit disclosure in relevant part (i) if the client authorizes it and (ii) under legal compulsion defined to mean an IRS summons, an SEC summons, or under a court order (the actual provision is a bit awkwardly worded, but that is the gist). The federal grand jury subpoena is not within the exceptions. In practice, however, the Texas Board of Public Accountancy has interpreted and applied the provisions to permit disclosure pursuant to a grand jury subpoena.

In In re Grand Jury Proceedings, Grand Jury No. 08-4, 2009 U.S. Dist. LEXIS 36066 (WD TX 2009), a CPA -- anonymously identified as John Doe ("Doe") -- received a grand jury subpoena for documents within the scope of the state prohibition. Doe moved to quash the subpoena on the basis that the actual language of the Texas prohibitions on disclosure did not cover a grand jury subpoena and that a court order is required. The Texas Board filed a letter brief agreeing that federal pre-emption required that the grand jury subpoena pre-empt the Texas rules so that the grand jury subpoena was a compulsory process that required disclosure without a court order. The court so held.

Practitioners in other jurisdictions should be aware that analogous anomalies may exist in their CPA rules and consider this case in shaping response on behalf of CPAs. But beyond determining what to do upon receipt of a grand jury subpoena, I think the more important lesson is that in the context of federal tax crimes, at a minimum compulsory process is required. Thus, the Texas rules cover IRS summonses in particular and now this decision (as well as the Board's own interpretation) cover grand jury subpoenas. But, it is clear that, short of those compulsory processes the CPA may not disclose.

In representing one of the defendants in the KPMG grand jury investigation, this issue came up. The prosecutors leading the grand jury investigation wanted my client to disclose the information otherwise covered by these Texas prohibitions in a proffer session without issuing a grand jury subpoena. (An IRS summons could not be issued because the matter had been referred to DOJ.) My client refused, citing the prohibition of state law. The prosecutors persisted in their demands, and accused my client of wrongfully impairing the investigation by my client's insistence upon complying with these prohibitions. I had confirmed with the Texas Board that my client's interpretation of their rules was correct and that a grand jury subpoena was required. I urged the prosecutors to discuss the issue with the Texas Board; the prosecutors refused to do so, saying that they did not care what the Texas Board thought. This impasse was never resolved, but the most amazing point was that the prosecutors absolutely and strongly insisted that my client violate the law and abused my client for not doing so.

And, not only did the prosecutors insist that my client violate the state law, the prosecutors seemed to be insist that my client violate a parallel federal prohibition in Section 7216 of the Code. That provision prohibits tax return preparers from disclosing information without compulsory process. Since the prosecutors refused to issue a grand jury subpoena, my client had no compulsory process allowing disclosure under Section 7216. The Regulations under Section 7216 permit disclosure to an "officer" of the grand jury and, of course, the prosecutors' only role was as representatives of the grand jury investigation that they were conducting. So, Section 7216 did not appear to be an insuperable barrier, but I did ask the prosecutors to confirm in writing that they were acting in their roles as prosecutors for the grand jury investigation. Although that was fairly obvious (at least to me), the prosecutors refused to so state in writing, and chose instead to heap abuse on me for asking for that representation in writing. (One of the prosecutors actually accused me of "fabricating" the position.)

Finally, one may ask about this episode with the prosecutors why they would not have issued a grand jury subpoena at the beginning. I was told that they wanted their proffer session to be free of the strictures of FRCrP Rule 6(e) which mandates the secrecy of grand jury matters. The prosecutors wanted to be free to deliver to the IRS the fruits of their efforts without being bound by Rule 6(e). I told the prosecutor with whom I dealt that I did not think that mere failure to use the grand jury subpoena would solve the 6(e) problem, because their role was as attorneys for the grand jury and 6(e) was thus implicated and governing. That is another issue so I will leave it for another day.

3 comments:

  1. Jack,

    I agree with the views you have expressed that state law as well as IRC sec. 7216 require compulsory process. At a minimum, this would appear to require such the proper issuance and service of such process as a Grand Jury subpoena, trial subpoena for testimony in connection with a pending federal criminal matter or administrative summons/civil investigative demand.

    I would like to point out that a subpoena for a deposition, hearing or trial in a federal civil matter (including quite possibly a quasi-criminal collateral matter under 28:2254 and the 2254 rules) would likely be governed by the applicable substantive rule of decision.

    Briefly:

    1. In a case that originated in or was removed to federal court based on a diversity predicate, state law would apply.

    2. In a case that originated in or was removed to federal court based on the general federal question predicate and invoking the federal court's supplementary jurisdiction, a federal judge would need to carefully analyze the matter before deciding whether federal or state law apply to privilege claims.

    Notwithstanding the foregoing discussion, I would think that it would be reasonable for an advisor's attorney (such as the attorney for a CPA) to move to quash any kind of compulsory process so that a federal district judge or federal magistrate judge can make an informed decision based on a developed record containing stipulated facts, evidence controverting unagreed assertions, and legal arguments. Although this course of action is quite expensive, it would go a long way for an advisor to establish (in the Court of Public Opinion) that he or she is not going to be pushed around.

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  2. Anonymous,

    Thsnks for your good comments.

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  3. You are very welcome, Jack.

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